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In City Often? Tax Man Asks Some for Tally

One couple, in a spirited attempt to claim that they were not subject to $41,000 in New York City income taxes, contended that their million-dollar Manhattan apartment was little more than “a hotel substitute” and that their “historic roots” were on Long Island, where they kept a yacht and a 3,500-square-foot home.

A husband and wife with an Upper East Side co-op who were facing over $270,000 in income tax penalties presented affidavits from managers at their regular hardware and wine shops in Connecticut, hoping to prove that they did not live in the city.

Yet another couple noted the devotion, time and money — $470,000 — that the wife had lavished on her garden in East Hampton, “which provided her with a great deal of solace”; it was evidence, they said, that they spent most of their time outside the city and that therefore they did not owe it $25,500.

The well-to-do with more than one home should be warned: it is the equivalent of sending a come-hither look to the tax man. And, as each of these unfortunates learned, pledging allegiance to the East End or the Constitution State will not save you from a very large bill.

Under longstanding rules, a person who spends more than half the year and maintains a home in New York City is taxed as a city resident. But this year, the state tax department, which collects both state and city income taxes, is adding a new line to 2010 tax forms, asking state residents who own second, or perhaps third and fourth, homes to specify how many days they spent in New York City. A number nearing 183 will be a red flag.

Thus, accountants and tax lawyers have been reminding their multi-homed clients to keep paper trails, as recent cases have shown the extent to which tax auditors and those being audited will go to try to prove — or disprove — permanent residence in the city.

In the event of an audit, the onus is on the taxpayers to prove that they were not in New York City, or in some cases, the state, for more than 183 days. Auditors and tax tribunals in these cases are often buried in blizzards of diaries, credit card slips, E-ZPass statements, e-mail and phone records.

In one case that reached the state’s tax tribunal last fall, the hedge fund billionaire Julian H. Robertson Jr. presented evidence that he had had his assistant painstakingly collect to account for his whereabouts each day, and said that on some late nights he had frantically searched for a car to take him back to Locust Valley, on Long Island, so that he would be outside the city limits before midnight. He convinced the tribunal that he had spent less than half of 2000, the year in question, in the city, and thus did not owe back taxes of $27 million.

Yet not everyone has the means, or the assistants, to so meticulously record their comings and goings. One tax lawyer, Timothy Noonan, is creating an iPhone app for clients to monitor their “New York days,” using GPS. “I have many clients who track days,” Mr. Noonan wrote in an e-mail, “and yes, many of these clients are very close to the line.”

While the question is new on the 2010 tax form, state officials said they had long been on the lookout for residency discrepancies.

Photo

Timothy Noonan, a tax lawyer, is developing an iPhone app to track a person's “New York days.”Credit
Dan Cappellazzo for The New York Times

About 230 of the tax department’s 1,800 auditors focus on residency cases, and the number of such audits has been inching up, to 2,508 for the 2010 fiscal year, which ended March 31, from 2,000 in fiscal year 2008 (though down from 2,900 six years ago).

“It’s not more aggressively auditing people,” Brad Maione, a spokesman from the tax department, said. “Our goal is for people to get it right on their tax return when they file it. Our audit program is to identify where people could be doing it wrong and to get them to correct it.”

A person who spends more than half the year in the city and has a permanent residence in it must pay city and state taxes on every dollar of their income, including money earned outside the city and from personal investments, which can sometimes be substantial.

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And the taxing authorities do not even have to prove that a person’s primary residence is in the five boroughs; they only have to show that the person maintains a “permanent place of abode” in the city, which tax officials interpret as a home that is habitable year-round. Proving the amount of time spent there is up to the taxpayer.

Thomas Puccio, owner of an Upper East Side co-op and a home in Weston, Conn., is the Park Avenue lawyer who successfully defended Claus von Bülow in his attempted murder trial. But he could not save himself from the tax department. He said he had spent only 111 days in the city or state in 2003, the audited year, but the tribunal concluded last month that despite the affidavits from the hardware store and wine shop in Connecticut, Mr. Puccio did not prove that he was not in the city or the state for another 109 days, meaning he had crossed the 183-day threshold and owed $271,382.

Peter Handal, the chief executive of Dale Carnegie & Associates, and his wife, Patricia, kept a home in a Park Avenue hotel. Neither her garden in East Hampton nor reams of credit card records and diary entries proved to the tribunal that the couple had spent most of 1999 outside the city.

The tax department took a second look at Dr. Norman Schulman and Susan Schulman, the couple rooted on Long Island, because they did not acknowledge their Upper East Side apartment on tax forms. The Schulmans also denied spending more than 183 days for each of the three years for which they were audited, saying they spent little time in the city except for Dr. Schulman’s work, as director of Lenox Hill Hospital’s Division of Plastic Surgery. The tribunal ruled against them.

In a case decided last month, clients of Mr. Noonan — John and Laura Barker of New Canaan, Conn. — unsuccessfully appealed the tax department’s finding that they owed $1 million to the state because they had a vacation home in Napeague, near Montauk.

Mr. Barker worked as an investment manager in New York City and did not dispute that he spent more than 183 days there. But the couple rarely stayed in Napeague and argued that it did not count as a New York State residence because state law says a “camp or cottage” suitable only for vacation use does not count as a permanent abode.

The opposing sides offered up details startling in their exactitude. The Barkers noted that the home lacked interior insulation and only had single-pane windows “in need of some repair.”

The tax department countered that Mrs. Barker’s parents used the place from November to May, that oil was delivered regularly and that the couple had year-round access. The tribunal found that the home, modest as it was, was not a camp or a cottage. Mr. Noonan said his clients were considering an appeal, in which they would argue that the tax laws were being misapplied to short-term vacationers in the state.

The decision, nonetheless, sent a small jitter through the Hamptons real estate market. Judi A. Desiderio, president of Town and County Real Estate in East Hampton, said three buyers from Connecticut had called off their hunts for multimillion-dollar homes this month. Instead, she said, they would simply rent from Memorial Day to Labor Day.

A version of this article appears in print on February 24, 2011, on Page A1 of the New York edition with the headline: In City Often? Tax Man Asks Some for Tally. Order Reprints|Today's Paper|Subscribe